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Citation – Third Quarter 2021

FUND PERFORMANCE

UPDATES AND PERFORMANCE

MESSAGE FROM CAM

BUCKLE UP!

ECONOMIC OUTLOOK

THE WORLD AFTER PEAK GROWTH

FUND PERFORMANCE

UPDATES AND PERFORMANCE

Harold Strydom
Investment Strategist and Portfolio Manager
Estimated reading time:

ASSETS VALUATION SIGNALS

Scenario modelling has formed part of Citadel’s investment philosophy for two decades, and it enables us to better understand potential market outcomes and construct stronger portfolios. The Asset Management team has a core or “High Conviction” scenario three-year view, which is expressed as macro and market assumptions like economic growth, inflation, interest rates, price-earnings (PE) multiples, credit spreads, etc. Our asset valuation models produce expected returns for various asset classes, based on these assumptions. This section will be used going forward to summarise our High Conviction view and the resulting asset signals.

The global economy is recovering from the pandemic-lows of last year, and our High Conviction scenario assumes above capacity global economic growth over the next year, and more moderate growth thereafter. Earnings rebounded strongly in the third quarter of 2021 across all regions. More moderate, but still attractive, earnings growth is projected globally over the next three years. Global equity market valuations, or PE ratios, fell sharply as earnings rebounded and are close to our exit or fair value PE assumptions. We assume PEs will remain above historical averages in this zero to negative real rate environment for the foreseeable future.

Global inflation will likely remain sticky for the next year or so but the rise in inflation is assumed to be mostly transitory when judged over a three-year period. The United States (US) is a key region where inflation is expected to average above “target”. We assume two short-term interest rates hikes in the US towards the end of our three-year modelling horizon, while in most other developed market rates are to remain at zero/negative. Developed market 10-year bond yields are assumed to rise from current deeply negative real-yield levels to be in line with inflation three years from now – that is zero percent real yields. Overall, this is still an accommodative environment, but the rise is likely to cause volatility across all markets.

The economic recovery in South Africa (SA) is assumed to be weaker than in developed and other major emerging markets. The profitability of domestic listed companies saw one of the sharpest recoveries of all regions in recent quarters. Subsequently, earnings are now above trend and little further earnings growth is projected over three years. History shows the cyclicality in domestic company earnings after an initial rebound that typically follows a recession. Inflation in SA is assumed to average 4.5%, and cash rates to rise moderately over the next three years. We assume a very steep yield curve, and high real long-term bond yields in recognition of SA’s fiscal and structural challenges.

From a medium-term valuation perspective, and under our High Conviction scenario, developed- and emerging-market equities (including SA equities) have an above-neutral expected return outlook. Domestic bonds have moved to above neutral, while US and global fixed income remain below neutral. SA and US cash are also currently giving below neutral valuation signals. The overall (medium-term) signal is therefore overweight equities and SA bonds and underweight cash and US fixed income. See the table below for a summary of our Asset Class Valuation Signals.

FUND PERFORMANCE

Domestic solutions risk profile

International solutions risk profile

Asset classes and economic data

Fund and portfolio performance

Rolling one year returns

Full report per fund

 

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